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May 15, 2017

Acing your SaaS budget

Financial model included

SaaS business model is quite different from traditional ones like e-commerce, marketplaces or apps. As a capability-driven and hands-on VC, we are often asked questions such as How to build a budget ? What are the best assumptions ? How much should you spend in marketing regarding other expenses ?

That’s why we compiled the best practices into an excel model to help you quickly become a SaaS Budgeting Killer. Just before checking out our template, we recommend that you read our post with our 4 key tips to be in line with our methodology.

→ If you’re in a hurry, you can download the spreadsheet at the end of the article ;)

Ready !? Here we go.

1/ Monitoring right KPIs is key for your success !

Monitoring relevant KPIs is obviously a serious matter when it comes to analyzing and predicting the profitability of your company. In fact, they are the pulse of your business.

Here are 4 of the most important metrics you should always be focused on:• MRR growth: the growth of your monthly recurring revenue• Average deal size• CAC ratio: proportion of Sales & Marketing amount spent to achieve your revenue• Churn: lost or downgraded contracts

These metrics are critical to understanding the health of your business. Hence, we recommend that you integrate them as soon as possible in your budget model. You can find all of them compiled in our Metrics & charts sheet (the last one).

2/ Building your topline

Building your topline is another huge matter. A lot of approaches are currently used with results more or less realistic.Here is a selection of realistic methods to build your topline:

A/ From your booking: deduce your MRR and your cash from your booking

B/ From your MRR: it is more or less the opposite of the previous approach. It consists in deducing a kind of booking from your MRR to predict your cash.

But before, to evaluate your booking or MRR, you should use one of these 2 methods:

1/ From your sales team:

Number of sales x sales ramp-up x sales quota with a safety factor from 20% to 30% (corresponding to “Failed Sales Hired Overhead on Sales Salaries” cell in our General Assumptions” sheet)

2/ From your existing customers:

Number of existing customers — churn + upsell (deduced from your customers cohorts) + new customers x average deal size of new customers

We chose to build our topline from booking (method A) forecasted with a combination of methods 1 and 2. In fact, we predict renew, upsell and churn from existing customers and evaluate new biz from our sales team.Our recommendation is to combine these two simulations (1) and (2), compare the results and check the consistency. If values are too different, it is a good opportunity to challenge yourself, your model and your assumptions.

3/ It is all about people…

People is a serious matter. Even more in this kind of business where salaries represent approximately 70% of your costs. But no pressure about your recruitments ;-). It is definitely crucial to be as precise as possible when it comes to people assumptions like variable compensations, annual increase rates and arrival dates.

Besides, a good practice is to take a security margin, especially with your sales quotas: consider that sales are going to achieve 80% to 85% of the quota you announce to build your forecast (Sales success factor in our FR & US Assumptions sheets). Hence, it seems fair to use this ratio to evaluate their variable compensations.

Finally, selling is not a long calm river and sales issues can occur at any time. That’s why, we recommend that you anticipate any issue with your sales team like a firing or a problem in recruiting with a 20% additional costs quota (Failed Sales Hired Overhead on Sales Salaries assumption). It will allow you you to react quickly and hire a new sales representative seamlessly.

4/ … and marketing

Next to people and salaries, marketing is a huge issue of SaaS businesses. It should never be neglected. That’s why we recommend that you build a detailed annual marketing plan including events organization, exhibitions, content (inbound), PR, etc. To build it, (1) list your key issues, (2) spread your marketing budget between each of them and finally (3) balance it over the year. It should be an integral part of your budget.

Because optimizing your marketing budget may prove to be a real brainteaser, we offer you a bonus method to evaluate your optimum marketing budget from your sales forecast and your target CAC ratio. You will find it in the FR & US Assumptions sheets.